lunedì 5 gennaio 2015

"Systemic importance", "radical parties", and democracy in the Eurozone

In a previous
post of this blog I published an email by Angelantonio Castelli, a physicist
who happens to belong to my small virtual class (first blog in economics in
Italy). He was so kind as to draw our attention on the meaning the words “systemic
importance” have for the German government. Quite obviously, and fully legitimately,
for the German government “systemic importance” means “risk for German owned
banks”. Angelantonio’s graph showed that the exposure of German (and
French) banks to Greece fell quickly over the last two years (not such a big
discovery, of course, but something the Italian media will never show to their audience),
which means that now Greece can leave, if it dares.

I produce
here some further graphs, answering the following questions: what about Italy?
And what countries are of “systemic importance” to Germany now? The data are
well known. I will then draw a simple political conclusion, that will prove
right. If it ever proves wrong, you know where I live: here!

Firstly,
this is the exposure to Greece of Germany, France, and the Netherlands (I left
aside Switzerland, which is important and interesting, but outside the Eurozone
– and proud of it):

Netherlands pattern is about the same, on a smaller scale (but mind the many statistical breaks in the series: detailed
information available on the BIS website).

Next, this
is the exposure of Germany, France, and the Netherlands, to Italy:

Once again,
we have a similar pattern: a very apparent trend reversal in bank lending since
the onset of the crisis (mind the break in the Netherlands’ series!). However,
in our (Italian) case, international lending stabilizes after the “whatever it
takes” bluff at the mid-2012 (yes, it is a bluff, and you know it, and even
Mario knows: let us see what happen in 2015, not just tomorrow!).

Then, I
show you the consolidated lending by Germany, France and Netherlands to Greece
and Italy, just for you to know that there is a small difference in size:

(I know you
suspected that Italy was larger than Greece, and you are not too surprised, but believe me: many people ignore
such simple details, and it is really worth providing them, if we wish
democracy to work as it should, not as technocrats want – more on democracy below).

Finally,
this is how the exposure of Germany towards its main partners evolved over
time:

And, once
again, no big surprise: Spain was the bigger problem, and this is the reason why
it was (and still is) allowed to repeatedly break the European budget rules. Everybody knows that in
a balance sheet recession public indebtedness is needed to favor private
sector deleveraging (have a look at Boltho and
Carlin’s paper, if you can). Basically, the German rule of the Eurozone was
so kind as to allow the Spaniards to transform non-performing loans of German
banks (private debt of Spanish firms and households towards Germany) into
Spanish public debt (I suppose you remember that Spanish public debt was
virtually zero before the crisis, don’t you?).

By the way,
this is a clear illustration of the purposes of the “anti-austerity/pro-euro” frame
adopted by the “left” all around in the Eurozone. You know, those silly guys
who keep “threatening” Germany, asking it to relieve “its”
absurd austerity rules? I call them “the appealian”, because they are so keen
to write (and underwrite) utterly
wise and spectacularly ill-timed “appeals” that nobody will read. If there was a political will to cooperate
in the Eurozone, we would not be in such a crisis. Full stop. So, what is the
point to write “appeals”, once it is so clear that nobody is willing to ever
look at them? They are at best of no “systemic importance”, and at worst of
some help to Germany, that in the present situation is already managing its “austerity”
in a very flexible way (as the Spanish case demonstrate).

Finally, a
few words about Hans Werner Tsipras.

Do you
remember when the European “progressive”, open-minded people, in Europe and elsewhere,
were so happy because they felt that Hollande was about to change the economic
landscape of the Eurozone? Well, it turns out that they
missed a little detail. Now they are missing a big one.

If you think that our
worst problem is Eurozone economic predicament, you are grossly mistaken. Our
first problem is democracy, for the reasons so neatly expressed by Axel Leijonhufvud
five
years ago. The Eurozone is the apex of the vincolo esterno (external constraint) political philosophy, well
described by Kevin Featherstone. Central bank independence is the mean to a
well-defined and openly declared end: subtract the governance of sovereign
states to elected politicians in order to empower a non-elected transnational
technocratic elite (please, have a look at Featherstone’s paper before starting
your populist rants about the European dream). The euro embodies central bank independence through article 123 of the Treaty on the Functioning of the European Union. It then follows that every people defending the euro nowadays, be it directly, like Mr. Draghi, or indirectly, like the "appealians" or Hans Werner Tsipras, is actually defending this political philosphy. Unfortunately, it turns out that this philosophy was (and still is) grounded on two
very unsound bases: the naive confidence in the existence of a “purely
technical” economic optimum, and the Machiavellian and paternalistic view that
the “good shepherds” could lie to the sheep in order to push them in the right direction.

On the
first point, I allow myself to point out to your attention that optimal inflation is not like optimal room temperature, which is well
known to lie in a small
range between 20 and
23 °C (68 and 73 °F),and which can be regulated by a technical device; there
is no widely agreed-upon definition of an optimal inflation rate, the Sheridan’s
approach of the ECB (the only good inflation is dead inflation) has pushed us
beyond the verge of a complete disaster, and since inflation affects wealth and
income distribution (as Leijonhufvud reminds us), you cannot have it regulated
by the “thermostat” of a technocratic central bank: you need politicians, and a
central bank obeying to them. Well, sorry, I was wrong. Not “you need”. You
should, if you believe in democracy, which is something nobody can force you to
do.

On the
second point, it is well known that the disastrous consequences of “putting the
cart before the horses” (in Dominick Salvatore’s words), i.e., of proceeding to
monetary union before political union, were well-known not
only to the profession, but also to the political elites. There is a huge
literature in the political science field showing that the “federalist”
approach to “Europeanisation” was based on the firm belief that proceeding the
wrong way would cause crises, but
those crises would have a positive outcome, because they would push the sheep
(i.e., you) towards the right end: the United States of Europe, supposed to be
the end of nationalism (much
in the same way the United States is, or...). Italian readers may find it
useful to have a look at Roberto
Castaldi’s paper, “Single currency and political union”. Castaldi, a distinguished
researcher in a reputed Italian university, explain us that:

But the
failure of the European People Congress showed that the historical crisis (of
the nation States, translator’s note) did not allow the federalists to mobilize
European citizens in favor of the federation. To this end, specific crises of
national sovereignty were needed, i.e., socially perceived problems that could
not be solved within the national framework. The occurrence of such crises was
a window of opportunity for the progress of the unification process, and
determined its direction: an economic crisis would favor developments towards
economic integration... Crises were opportunities for the development of a
federalist “initiative”.

In other
words, the European elites knew very well that a crisis was ahead. In the Italian
case, we have direct evidence of this (besides authoritative studies, like the
one I just quoted). For instance, the minutes of the Italian Chamber still
reports Giorgio Napolitano’s speech against Italy’s accession to the EMS. His
word make it plain that he was fully and completely aware of the dangers that
this process would bring about: de-industrialization of the weak countries and
deflation all around (to the damage of the working class, which at that time he
was supposed to defend, being a communist, and a former supporter of this
unfortunate event).

Against
this background, monetary unification was “sold” by those elite as a big deal
for their constituencies. In Romano Prodi’s (in)famous words, Italian people “would
earn as if they would work one day more, by working one day less”. This is what
he told to his constituency in Italy, but he was lying, because at the same
time he was releasing interviews to the Financial Times where he
openly confessed that he was fully aware of the fact that Europe was not ready
for the single currency, that this would cause a crisis, and that the
crisis would force the European citizens to adopt the correct “political
instruments” (e.g., labour market flexibility).

Needless to
say, democracy cannot work if politicians (and the media system) purposely and
consistently lie to their constituencies. You may have whatever opinion of the supposed
Christian roots of Europe, but whatever you mean and whatever the God you
believe in (if any), Jesus Christ’s words: “truth will set you free” (John,
8:32) are a political truth. Admittedly a long-run one, but still a truth.
Lying to the European constituency has brought us to slavery (under the markets’
domination).

Hans Werner
Tsipras in Greece, and Podemos in Spain, are fighting their political battle
with the same weapons as the European elite did: by lying to their constituencies.
They refrain systematically from pointing out the nowadays universally recognized
source of our troubles (the euro), and they keep making promises they will
never be able to keep: banging their little fists on the big European table in
order to “force” Frau Merkel to do what they want.

Here in
Italy we had a recent example of where this course of action brings: to
failure. The Five Stars Movement of Grillo, which was supposed by everyone in
Europe (except me) to be anti-euro, has actually refrained to take any definite
stance on this issue, on the basis of the assumption that too definite an
attitude would frighten their “median voter”. It was better to elude “hot”
topics, in order to reach the power, and only afterwards do the “right thing”. Following
this approach, they ran a populist, "anti-clique", “anti-corruption” (i.e., anti-government
intervention in the economy) campaign, which proved successful the first time (in 2013 political elections), but
self-defeating immediately afterwards (in the local elections of June 2013, and even more in the European elections of May 2014).

Much in the
same way, Hans Werner Tsipras is not mentioning the euro, supposedly because he think this
would frighten the Greek “median voter” (in full Stockholm syndrome),
Podemos in Spain is running an “anti-corruption” campaign, and both are focusing
on public debt issues, while even the ECB has long recognized that the problem
lies elsewhere: in private lending from the North to the private sector of the
South (do you remember the graphs above? That was private debt. And please have
a look at Constancio’s speech
and slides).

It is worth
noting that the two supposedly “radical-left” parties in Europe owe their
success to a full endorsement of the frame put forth by the European
technocratic elite: namely, that the crisis was determined by public debt,
whose abnormal growth (well, it as actually a decrease) was engendered by the public sector inefficiency and
corruption.

This implicit endorsement will of course favor their accession to the
power, for two reasons: it does not disturb the elites (that are really happy
to have the supposed opposition endorsing their Weltanschauung!), and it does
not disturb the constituency, which hears a familiar story. At the same time, this endorsement does not
contradicts too much their supposed “anti-austerity” stance. Once again, the opposition
to austerity is not such a bad deal for Northern creditors (as the graphs above
should prove: it allowed them to transfer their NPL’s to the balance sheets of
the stressed governments!), and it is of course favored by the “progressive”
constituency. Yes, indeed what the “appealians” want is at the same time less
State, and more State. But this in principle is not a contradiction: everybody
wants less (corrupted) State and more (efficient) State. Me too, for sure! However,
in countries like Italy (just to quote one), corruption (which of course needs
to be eradicated) was always widespread, even when the country grew at a 3%
pace. So, why are we not growing now? And why are other, equally corrupted, countries growing?

Summing up,
these “radical” approaches will fail, because they are as anti-democratic as
the elite approach was.

It is high time to tell the truth. If you keep repeating
that the problem is “corruption”, public debt, austerity, or whatever, and not the euro, you will have
the median voter, but the final result will not be the expected one (use your
power to force Germany to do what you want), but the opposite one: you will be crushed
(as Beppe Grillo was in Italy) by the blackmail of the median voter, who will never understand where the
problem is (because you never did something to inform him) and will therefore
ask you to destroy the remainder of the (corrupted?) State, which according to
the elite’s journals is the culprit, giving more way to the elite you were supposed to fight!

Not such a
huge success for supposedly left-wing movements, is it? In fact, chances are
that they will fail. But should they win, both the above graphs, and political
intuition, show that they will never be able to change the course of our
crisis. Just let us imagine how this would happen: Hans Werner, or Podemos,
reach the power, then they appear on a balcony and tell to the people: “Countermand,
comrades: the euro and private finance, not the clique and public debt, was the
problem!”. Well, I will not say that this will never happen. But should it
happen, they would immediately lose a large share of their constituency: snakes
and ladder, you know?

Remember
the words of that ancient blogger: truth will set you free. Any political movement
that really intends to change things in Europe should never ever do the same
political mistake as the criminal elite that carried out the European project so far:
become trapped in its own lies.

Just to give you an exemple: Alessandro Di Battista (a Five Stars MP) statement a few days ago was
a wonderful piece of dadaist policy: "If there is no toilet paper in
our schools, blame corruption". Well, after having experienced the
troika (if we ever do, which is likely, with such statesmen!), I think
we will put corruption in perspective...

European citizens are adults, they deserve and can
afford to hear the truth. And the technical truth is that we need a nominal
realignment now: we need to overcome the euro, that was a huge historical
mistake, and restore flexibility among European currencies. Have you ever
dropped a crystal and a plastic glass at the same time? Which one broke? And
why? Yes, right: because it was not flexible enough.

Think of
it.

If you don’t
believe me, nor
Jesus Christ, believe your eyes. This will avoid us the painful need to
remove the shards of the Eurozone.

P.s.: all the above implies that the victory of Syriza (or Podemos) will have no real impact. If it does, you will remember my words. If it does not, you will forget them. So is life...

Clear, simple, biting. Don't you know when you write other languages, you seem simpler? Think about, it needs :-). You growing as the audience of the blog!You're making me seriously analyze my etherosexuality ahahahahahah.

I have already asked them through Mr. Black. We will try to establish an agreement, such that when I write in English, I entrust them with the translation, and I put the link to their blogpost on my blog.

Dear Prof. Bagnai,some considerations:- Syriza and Podemos are over-estimated by mass-media coverage. They won't win. They will do the same ending as M5S in Italy at the last political elections.- I allow myself to suggest this article by italian political scientist Nadia Urbinati, that I think shares with you many positions, but proposes a different view on the use of "truth" in the democratic political arena http://ilrasoiodioccam-micromega.blogautore.espresso.repubblica.it/2014/12/02/su-democrazia-e-populismo-controreplica-a-mccormick-del-savio-e-mameli/Best regards

Not sure I dare to question the wise considerations, in English, of the professor. I have more of a question that led him to externalize in Anglo-Saxon: I do not think that naming some of the characters in Italian appointed by him can bring them no advantage.But in any case we are coming to the point, or, to put it to the Florentine, "we are at the gates with stones".For the first time since the euro came into circulation, there is the serious possibility that a country eurozone face their bags and go back to their national currency.The consequences are serious, nothing but talk: as reported good this article:http://www.corriere.it/economia/15_gennaio_05/borse-europee-profondo-rosso-pesano-timori-grecia-66cbba56-94ec-11e4-b882-edd16a1de18c.shtml.

On the other hand, I never considered as realistic and viable a down-up or "on popular basis" resolution to this crisis: never. And for many indisputable and insurmountable reasons.

But, having to ANSWER an unbiased and truthful answer to other people QUESTIONS about what we, Italians, THEORETICALLY need, I'd keep on saying: collective and widespread awareness and a real democratic unity in this attitude.

This substancial democratic conviction is a personal "best wish" for all italian people. But never was to criticize or hinder the viable and more practical roads to realistic resolutions that pass through different and forced-by-facts directions of action.So I don't wish you any "Buona sconfitta"; quite the opposite!. I'd deem this simple words pointless and inconsistent and reject them as totally strange to my vision,so, best wishes

Wise words as usual. My point is very simple (and I will explain it in a later post): we do really not know what we are doing and where we are moving. I mean: think to the MMT-Donald story. If I was a plot theorist, I could say: "Economists very close to the establishment of a major superpower interested in keeping the euro (for TTIP reasons) lent their credibility to a fool whose only purpose was to ridiculize an alternative vision of Europe". Just to give you an example. I do not think that things went really this way, but... who knows? Therefore, I think that our first duty is to be very careful. Our first tactical advantage so far was to be invisible. Now we are visible. If we ever become dangerous, Strauss-Kahn is just around the corner. Needless to say, this raises another question. How should we interpret the role of the intellectual? We know that Spinelli and the like, the ideologues of the modern fascism, had a truly paternalistic attitude: "People do not understand, let us guide them towards (our) truth". I would like to state very clearly that when I am skeptical against the "Podemos" approach it is not because I am an elitist, but because I think (as you do) that the right way to empower people is to spread awareness. This is what we have kept doing for years, and I am sure that we will continue. It would be a pity if such a huge work would be spoiled by the contact with insane people. Don't you think so?

Actually, there's no need whatsoever to engage and, worse, to keep any contact with insane people. It's already difficult to manage a normal life (or even a "real" one) leading a mere infomation-blog-lectures activity.

But insane people may unavoidably come across a public oriented activity, whether you like it or not (obviously not).Being in mid-stream (beyond a certain threshold..and not "main-stream"), it's difficult to tell "a priori" what is the line between due and undue contacts, anyway. You can only learn by some mistakes and regrets.

I realize that even the price of such a thing like "being on twitter" is too high for a scholar and on ordinary private person.I really don't have (anymore) a solution.

These "in command" are VERY bad people. And you're right: Strauss-Kahn is always there as a reminder.

But what I'm more and more sure of, is that there are still too many people, and I mean those who know or can undertand and "speak" and stand up for democracy, that are silent, and waiting for things to evolve, while standing (cunningly) at the window.And such behavior to me is tantamount to collusion.But perhaps the're right and we're wrong in a practical terms.But who cares by now? Take...care